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Tax Treatment of Interest on US Savings Bonds

September 8, 2023

The interest earned on a savings bond is the amount by which the bond can be redeemed above its face value or original purchase price. Generally, interest on U.S. savings bonds is taxed at the federal level, but not at the state or local income level. Owners can wait to pay the tax when they cash in the bond, when the bond matures, or when they transfer the bond to another owner. Alternatively, they can pay the tax annually as interest accrues.

Deferral method and Accrual method

Most people defer reporting interest until they file their federal income tax return for the year in which they redeem the bond (deferral method). If the taxpayer elects to defer reporting interest, the amount taken into account at the time of redemption is the difference between the amount paid and the amount redeemed, less any amount on which the taxpayer has already paid taxes.

If the owner elects to report interest income annually (accrual method), he/she must continue to report income from this bond and from all other savings bonds of the same owner each year. In this case, interest would accrue but not be received. In some circumstances, it may be beneficial for a taxpayer to elect to file in the year the interest income accrues:

  • If a taxpayer who is deferring interest income on a bond has a taxable year with very low income, it may be beneficial to change methods and recognize the accrued interest income in that lower income year.

  • If the bonds are held in the name of a child who has reached the age of 18 and the child will have significant income in later years, it may be beneficial to recognize the accrued interest income in the year before the child's income increases.

  • For taxpayers with low investment interest deduction limits, recognizing accrued interest income may help offset investment interest expense.

  • A decedent's estate may benefit from recognizing interest income accrued through the date of the decedent's death on the decedent's final income tax return so that the beneficiary is not taxed on the income.

When changing the method

Taxpayers can change from the deferral method to the accrual method and vice versa. A taxpayer may change from the deferral method to the accrual method without IRS permission. In the year of the change, the taxpayer must report all interest accrued in prior years that was not previously reported. The interest accrued must be reported on the taxpayer's original return. The taxpayer cannot change to the accrual method on an amended return filed after the original return’s due date.

However, a taxpayer needs IRS consent to change from the accrual method to the deferral method. Taxpayers may use the automatic consent procedure to revoke previous election of the accrual method and use the deferral method. The revocation of this election is made by attaching a statement to the taxpayer's tax return.

IRS Form 1099-INT

Interest earned on the bond is reported on a 1099-INT after the bond is cashed in or reissued to reflect a taxable change in ownership. The 1099-INT shows all the interest earned on the bond over the years.

If a financial institution pays the bond, the taxpayer will receive a paper 1099-INT from that institution either soon after the bond is cashed or within two months after the end of the year in which the bond is cashed. If the electronic bond is cashed into a TreasuryDirect account, the 1099-INT will be available in the account early in the following year.

Education Tax Exclusion

A taxpayer may be able to exclude from income all or a portion of the interest earned on the redemption of certain U.S. savings bonds if the taxpayer pays qualified higher education expenses for him or herself, spouse, or dependents during the same taxable year. However, there are many limitations associated with this interest exclusion. For example, the taxpayer must file a joint return if married, and the taxpayer must be at least 24 years old before the bond's issue date.


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